LKQ CORPORATION (Exact name of registrant as specified in its charter)

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2018 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from Commission File Number: LKQ CORPORATION (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) to (I.R.S. Employer Identification No.) 500 WEST MADISON STREET, SUITE 2800, CHICAGO, IL (Address of principal executive offices) (Zip Code) Registrant s telephone number, including area code: (312) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). At October 24, 2018, the registrant had issued and outstanding an aggregate of 318,202,654 shares of Common Stock. Yes No x

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3 PART I FINANCIAL INFORMATION Item 1. Financial Statements LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Income (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, Revenue $ 3,122,378 $ 2,465,800 $ 8,873,893 $ 7,267,054 Cost of goods sold 1,925,180 1,508,924 5,460,845 4,415,076 Gross margin 1,197, ,876 3,413,048 2,851,978 Selling, general and administrative expenses (1) 879, ,978 2,472,085 2,003,065 Restructuring and acquisition related expenses 6,614 4,922 26,546 10,371 Depreciation and amortization 76,701 56, , ,178 Operating income 234, , , ,364 Other expense (income): Interest expense, net 40,860 25, ,647 73,806 Gains on bargain purchases (913) (328) (3,990) Other income, net (6,959) (3,107) (9,086) (6,884) Total other expense, net 33,901 21,202 98,233 62,932 Income from continuing operations before provision for income taxes 200, , , ,432 Provision for income taxes 46,068 58, , ,206 Equity in (losses) earnings of unconsolidated subsidiaries (20,284) 2,673 (18,326) 3,878 Income from continuing operations 134, , , ,104 Net loss from discontinued operations (4,531) Net income 134, , , ,573 Less: net income attributable to noncontrolling interest 378 1,040 Net income attributable to LKQ stockholders $ 134,102 $ 122,381 $ 444,069 $ 409,573 Basic earnings per share: (2) Income from continuing operations $ 0.42 $ 0.40 $ 1.42 $ 1.34 Net loss from discontinued operations (0.01) Net income Less: net income attributable to noncontrolling interest Net income attributable to LKQ stockholders $ 0.42 $ 0.40 $ 1.42 $ 1.33 Diluted earnings per share: (2) Income from continuing operations $ 0.42 $ 0.39 $ 1.41 $ 1.33 Net loss from discontinued operations (0.01) Net income Less: net income attributable to noncontrolling interest Net income attributable to LKQ stockholders $ 0.42 $ 0.39 $ 1.41 $ 1.32 (1) Selling, general and administrative expenses contain facility and warehouses expenses and distribution expenses that were previously shown separately. (2) The sum of the individual earnings per share amounts may not equal the total due to rounding. The accompanying notes are an integral part of the condensed consolidated financial statements. 2

4 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Comprehensive Income (In thousands) Three Months Ended Nine Months Ended September 30, September 30, Net income $ 134,480 $ 122,381 $ 445,109 $ 409,573 Less: net income attributable to noncontrolling interest 378 1,040 Net income attributable to LKQ stockholders 134, , , ,573 Other comprehensive income (loss): Foreign currency translation, net of tax (20,951) 59,618 (77,630) 174,794 Net change in unrealized gains/losses on cash flow hedges, net of tax 304 (1,776) 5, Net change in unrealized gains/losses on pension plans, net of tax 1,274 (150) (154) (4,053) Net change in other comprehensive income (loss) from unconsolidated subsidiaries 643 (1,034) 2,160 (1,635) Other comprehensive (loss) income (18,730) 56,658 (69,660) 169,563 Comprehensive income 115, , , ,136 Less: comprehensive income attributable to noncontrolling interest 378 1,040 Comprehensive income attributable to LKQ stockholders $ 115,372 $ 179,039 $ 374,409 $ 579,136 The accompanying notes are an integral part of the condensed consolidated financial statements. 3

5 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets (In thousands, except share and per share data) Current assets: Assets September 30, December 31, Cash and cash equivalents $ 341,346 $ 279,766 Receivables, net 1,255,876 1,027,106 Inventories 2,794,894 2,380,783 Prepaid expenses and other current assets 200, ,479 Total current assets 4,593,060 3,822,134 Property, plant and equipment, net 1,201, ,089 Intangible assets: Goodwill 4,475,266 3,536,511 Other intangibles, net 953, ,769 Equity method investments 157, ,404 Other assets 205, ,965 Current liabilities: Total assets $ 11,585,336 $ 9,366,872 Liabilities and Stockholders Equity Accounts payable $ 941,747 $ 788,613 Accrued expenses: Accrued payroll-related liabilities 153, ,424 Other accrued expenses 358, ,600 Refund liability 106,732 Other current liabilities 57,088 45,727 Current portion of long-term obligations 118, ,360 Total current liabilities 1,735,680 1,322,724 Long-term obligations, excluding current portion 4,250,137 3,277,620 Deferred income taxes 325, ,359 Other noncurrent liabilities 376, ,516 Commitments and contingencies Stockholders equity: Common stock, $0.01 par value, 1,000,000,000 shares authorized, 318,197,309 and 309,126,386 s hares issued and outstanding at September 30, 2018 and December 31, 2017, respectively 3,182 3,091 Additional paid-in capital 1,409,242 1,141,451 Retained earnings 3,562,827 3,124,103 Accumulated other comprehensive loss (134,791) (70,476) Total Company stockholders' equity 4,840,460 4,198,169 Noncontrolling interest 56,956 8,484 Total stockholders' equity 4,897,416 4,206,653 Total liabilities and stockholders equity $ 11,585,336 $ 9,366,872 The accompanying notes are an integral part of the condensed consolidated financial statements. 4

6 CASH FLOWS FROM OPERATING ACTIVITIES: LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands) Nine Months Ended September 30, Net income $ 445,109 $ 409,573 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 210, ,508 Impairment on Mekonomen equity method investment 22,715 Stock-based compensation expense 17,544 17,582 Loss on sale of business 8,580 Other (7,187) (11,982) Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: Receivables, net (70,797) (75,444) Inventories (71,058) (97,584) Prepaid income taxes/income taxes payable 7,262 (928) Accounts payable (71,997) 42,175 Other operating assets and liabilities 38,599 (9,237) Net cash provided by operating activities 521, ,243 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (171,763) (135,537) Acquisitions, net of cash acquired (1,206,067) (252,667) Proceeds from disposals of business/investment 301,297 Investments in unconsolidated subsidiaries (11,066) (7,114) Receipts of deferred purchase price on receivables under factoring arrangements 9,410 Other investing activities, net 7,970 9,864 Net cash used in investing activities (1,371,516) (84,157) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 3,772 6,465 Taxes paid related to net share settlements of stock-based compensation awards (4,768) (5,095) Debt issuance costs (16,938) Proceeds from issuance of Euro Notes (2026/28) 1,232,100 Borrowings under revolving credit facilities 1,025, ,976 Repayments under revolving credit facilities (1,110,035) (770,884) Repayments under term loans (114,800) (27,884) Borrowings under receivables securitization facility 8,525 Repayments under receivables securitization facility (9,925) (Repayments) borrowings of other debt, net (38,695) 24,522 Payments of other obligations (2,079) Other financing activities, net 3,182 4,316 Net cash provided by (used in) financing activities 979,314 (347,063) Effect of exchange rate changes on cash and cash equivalents (67,385) 22,538 Net increase in cash and cash equivalents 61,580 40,561 Cash and cash equivalents of continuing operations, beginning of period 279, ,400 Add: Cash and cash equivalents of discontinued operations, beginning of period 7,116 Cash and cash equivalents of continuing and discontinued operations, beginning of period 279, ,516 Cash and cash equivalents, end of period $ 341,346 $ 275,077 Supplemental disclosure of cash paid for: Income taxes, net of refunds $ 158,740 $ 218,332 Interest 74,417 57,519 Supplemental disclosure of noncash investing and financing activities:

7 Stock issued in acquisitions $ 251,334 $ Contingent consideration liabilities 3,107 6,234 Notes payable and other financing obligations, including notes issued and debt assumed in connection with business acquisitions/investment 82,664 52,576 Noncash property, plant and equipment additions 11,010 4,918 Notes and other financing receivables in connection with disposals of business/investment 5,848 The accompanying notes are an integral part of the condensed consolidated financial statements. 5

8 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders Equity (In thousands) Common Stock Shares Issued Amount Additional Paid- In Capital LKQ Stockholders Retained Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Stockholders' Equity BALANCE, July 1, ,821 $ 3,178 $ 1,403,630 $ 3,428,725 $ (116,061) $ 57,503 $ 4,776,975 Net income 134, ,480 Other comprehensive loss (18,730) (18,730) Vesting of restricted stock units, net of shares withheld for employee tax (937) (934) Stock-based compensation expense 5,700 5,700 Exercise of stock options Capital contributions from, net of dividends to, noncontrolling interest shareholder (925) (925) BALANCE, September 30, ,197 $ 3,182 $ 1,409,242 $ 3,562,827 $ (134,791) $ 56,956 $ 4,897,416 Common Stock Shares Issued Amount Additional Paid- In Capital LKQ Stockholders Retained Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Stockholders' Equity BALANCE, January 1, ,127 $ 3,091 $ 1,141,451 $ 3,124,103 $ (70,476) $ 8,484 $ 4,206,653 Net income 444,069 1, ,109 Other comprehensive loss (69,660) (69,660) Stock issued in acquisitions 8, , ,334 Vesting of restricted stock units, net of shares withheld for employee tax (3,717) (3,711) Stock-based compensation expense 17,544 17,544 Exercise of stock options ,768 3,772 Shares withheld for net share settlement of stock option awards (27) (1,057) (1,057) Adoption of ASU (see Note 4) (5,345) 5,345 Capital contributions from, net of dividends to, noncontrolling interest shareholder 3,182 3,182 Acquired noncontrolling interest 44,250 44,250 BALANCE, September 30, ,197 $ 3,182 $ 1,409,242 $ 3,562,827 $ (134,791) $ 56,956 $ 4,897,416 The accompanying notes are an integral part of the condensed consolidated financial statements. 6

9 LKQ CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Stockholders Equity (In thousands) Common Stock Shares Issued Amount Additional Paid- In Capital LKQ Stockholders Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Stockholders' Equity BALANCE, July 1, ,621 $ 3,086 $ 1,130,318 $ 2,877,551 $ (154,270) $ 3,856,685 Net income 122, ,381 Other comprehensive income 56,658 56,658 Vesting of restricted stock units, net of shares withheld for employee tax (1,142) (1,140) Stock-based compensation expense 5,139 5,139 Exercise of stock options ,312 1,314 Shares withheld for net share settlement of stock option awards (1) BALANCE, September 30, ,018 $ 3,090 $ 1,135,627 $ 2,999,932 $ (97,612) $ 4,041,037 Common Stock Shares Issued Amount Additional Paid- In Capital LKQ Stockholders Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Stockholders' Equity BALANCE, January 1, ,545 $ 3,075 $ 1,116,690 $ 2,590,359 $ (267,175) $ 3,442,949 Net income 409, ,573 Other comprehensive income 169, ,563 Vesting of restricted stock units, net of shares withheld for employee tax (3,902) (3,895) Stock-based compensation expense 17,582 17,582 Exercise of stock options ,457 6,465 Shares withheld for net share settlement of stock option awards (35) (1,200) (1,200) BALANCE, September 30, ,018 $ 3,090 $ 1,135,627 $ 2,999,932 $ (97,612) $ 4,041,037 The accompanying notes are an integral part of the condensed consolidated financial statements. 7

10 Note 1. Interim Financial Statements LKQ CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements The accompanying unaudited condensed consolidated financial statements represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries. We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018 ("2017 Form 10-K"). Note 2. Business Combinations On May 30, 2018, we acquired Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Slovenia, Croatia, and with further sales to Switzerland. Total acquisition date fair value of the consideration for our Stahlgruber acquisition was 1.2 billion ($ 1.4 billion ), composed of 1.0 billion ($ 1.1 billion ) of cash paid (net of cash acquired), and 215 million ($ 251 million ) of newly issued shares of LKQ common stock. We financed the acquisition with the proceeds from 1.0 billion ( $1.2 billion ) of senior notes, the direct issuance to Stahlgruber's owner of 8,055,569 newly issued shares of LKQ common stock, and borrowings under our existing revolving credit facility. On May 3, 2018, the European Commission cleared the acquisition for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of the Czech Republic wholesale business has been referred to the Czech Republic competition authority for review. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability. We recorded $ 929 million of goodwill related to our acquisition of Stahlgruber, of which we expect $292 million to be deductible for income tax purposes. In the period between the acquisition date and September 30, 2018, Stahlgruber, which is reported in our Europe reportable segment, generated revenue of $ 637 million and operating income of $ 34 million. In addition to our acquisition of Stahlgruber, during the nine months ended September 30, 2018, we completed acquisitions of one wholesale business in North America and seven wholesale businesses in Europe. Total acquisition date fair value of the consideration for these acquisitions was $ 86 million, composed of $ 76 million of cash paid (net of cash acquired), $7 million of notes payable, and $3 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $5 million ). During the nine months ended September 30, 2018, we recorded $72 million of goodwill related to these acquisitions, of which we expect an immaterial amount to be deductible for income tax purposes. In the period between the acquisition dates and September 30, 2018, these acquisitions generated revenue of $19 million and operating income of $2 million. During the year ended December 31, 2017, we completed 26 acquisitions including 6 wholesale businesses in North America, 16 wholesale businesses in Europe and 4 Specialty businesses. Our acquisitions in Europe included the acquisition of four aftermarket parts distribution businesses in Belgium in July Our Specialty acquisitions included the acquisition of the aftermarket business of Warn Industries, Inc. ("Warn"), a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories, in November

11 Total acquisition date fair value of the consideration for our 2017 acquisitions was $542 million, composed of $510 million of cash paid (net of cash acquired), $6 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $19 million ), $5 million of other purchase price obligations (non-interest bearing) and $20 million of notes payable. We typically fund our acquisitions using borrowings under our credit facilities or other financing arrangements. During the year ended December 31, 2017, we recorded $307 million of goodwill related to these acquisitions, of which we expect $21 million to be deductible for income tax purposes. Our acquisitions are accounted for under the purchase method of accounting and are included in our consolidated financial statements from the dates of acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair values at the dates of acquisition. The purchase price allocations for the acquisitions made during the nine months ended September 30, 2018 and the last three months of the year ended December 31, 2017 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value of certain liabilities assumed; and 4) the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations. From the date of our preliminary allocation for Stahlgruber in the second quarter of 2018 through September 30, 2018, we recorded adjustments based on our valuation procedures, primarily related to inventory and current liabilities that resulted in the allocation of $1 million of goodwill to acquired net assets. From the date of our preliminary allocations for our other acquisitions completed in the first half of 2018, the measurement period adjustments recorded for acquisitions completed in prior periods were not material. The income statement effect of these measurement period adjustments for our Stahlgruber acquisition and our other acquisitions completed in the first half of 2018 that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition dates was immaterial. The balance sheet impact and income statement effect of other measurement-period adjustments recorded for acquisitions completed in prior periods were immaterial. The purchase price allocations for the acquisitions completed during the nine months ended September 30, 2018 and the year ended December 31, 2017 are as follows (in thousands): Nine Months Ended Year Ended September 30, 2018 December, 31, 2017 Other Acquisitions All Stahlgruber (2) Total Acquisitions (1) Receivables $ 140,979 $ 15,369 $ 156,348 $ 73,782 Receivable reserves (2,818) (875) (3,693) (7,032) Inventories (3) 374,056 12, , ,342 Prepaid expenses and other current assets 9,537 1,806 11,343 (295) Property, plant and equipment 260,661 6, ,750 41,039 Goodwill 929,376 68, , ,817 Other intangibles 285,529 16, , ,216 Other assets 16, ,662 3,257 Deferred income taxes (97,805) (716) (98,521) (65,087) Current liabilities assumed (343,221) (20,662) (363,883) (111,484) Debt assumed (65,852) (4,410) (70,262) (33,586) Other noncurrent liabilities assumed (4) (81,689) (9,993) (91,682) (1,917) Noncontrolling interest (44,250) (44,250) Contingent consideration liabilities (3,107) (3,107) (6,234) Other purchase price obligations (2,349) 3,853 1,504 (5,074) Stock issued (251,334) (251,334) Notes issued (6,948) (6,948) (20,187) Settlement of pre-existing balances 242 Gains on bargain purchases (5) (328) (328) (3,870) Settlement of other purchase price obligations (non-interest bearing) 1,698 1,698 3,159 Cash used in acquisitions, net of cash acquired $ 1,127,445 $ 78,622 $ 1,206,067 $ 513,088 9

12 (1) The amounts recorded during the year ended December 31, 2017 include $6 million and $3 million of adjustments to reduce property, plant and equipment and other assets for Rhiag-Inter Auto Parts Italia S.r.l. ( Rhiag ) and Pittsburgh Glass Works LLC ( PGW ), respectively. (2) The amounts recorded during the nine months ended September 30, 2018 include a $5 million adjustment to increase other intangibles related to our Warn acquisition and $4 million of adjustments to reduce other purchase price obligations related to other 2017 acquisitions. (3) The amounts for our 2017 acquisitions include a $4 million step-up adjustment related to our Warn acquisition. (4) The amount recorded for our acquisition of Stahlgruber includes a $75 million liability for certain pension obligations. See Note 13, "Employee Benefit Plans" for information related to our defined benefit plans. (5) The amount recorded during the nine months ended September 30, 2018 is due to the gain on bargain purchase related to an acquisition in Europe completed in the second quarter of 2017 as a result of a change in the acquisition date fair value of the consideration. The amount recorded during the year ended December 31, 2017 includes a $2 million increase to the gain on bargain purchase recorded for our Andrew Page Limited ("Andrew Page") acquisition as a result of changes to our estimate of the fair value of the net assets acquired. The remainder of the gain on bargain purchase recorded during the year ended December 31, 2017 is an immaterial amount related to the previously mentioned acquisition in Europe completed in the second quarter of The fair value of our intangible assets is based on a number of inputs, including projections of future cash flows, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. The fair value of our property, plant and equipment is determined using inputs such as market comparables and current replacement or reproduction costs of the asset, adjusted for physical, functional and economic factors; these adjustments to arrive at fair value use unobservable inputs in which little or no market data exists, and therefore, these inputs are considered to be Level 3 inputs. See Note 12, "Fair Value Measurements " for further information regarding the tiers in the fair value hierarchy. The acquisition of Stahlgruber expands LKQ's geographic presence in continental Europe and serves as an additional strategic hub for our European operations. In addition, we believe the acquisition of Stahlgruber will allow for continued improvement in procurement, logistics and infrastructure optimization. The primary objectives of our other acquisitions made during the nine months ended September 30, 2018 and the year ended December 31, 2017 were to create economic value for our stockholders by enhancing our position as a leading source for alternative collision and mechanical repair products and to expand into other product lines and businesses that may benefit from our operating strengths. Certain 2017 acquisitions were completed to enable us to align our distribution model in the Benelux region. When we identify potential acquisitions, we attempt to target companies with a leading market presence, an experienced management team and workforce that provides a fit with our existing operations, and strong cash flows. For certain of our acquisitions, we have identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill. 10

13 The following pro forma summary presents the effect of the businesses acquired during the nine months ended September 30, 2018 as though the businesses had been acquired as of January 1, 2017, and the businesses acquired during the year ended December 31, 2017 as though they had been acquired as of January 1, The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, September 30, Revenue, as reported $ 3,122,378 $ 2,465,800 $ 8,873,893 $ 7,267,054 Revenue of purchased businesses for the period prior to acquisition: Stahlgruber 473, ,405 1,289,083 Other acquisitions 6,641 83,893 51, ,844 Pro forma revenue $ 3,129,019 $ 3,023,019 $ 9,740,430 $ 8,943,981 Income from continuing operations, as reported (1) $ 134,480 $ 122,381 $ 445,109 $ 414,104 Income from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments: Stahlgruber 5,054 6,061 14,114 5,298 Other acquisitions 161 3,478 1,588 17,014 Acquisition related expenses, net of tax (2) 681 2,301 13,986 5,010 Pro forma income from continuing operations 140, , , ,426 Less: Pro forma net income attributable to noncontrolling interest 888 2,799 2,157 Pro forma income from continuing operations attributable to LKQ stockholders $ 140,376 $ 133,333 $ 471,998 $ 439,269 Earnings per share from continuing operations, basic - as reported $ 0.42 $ 0.40 $ 1.42 $ 1.34 Effect of purchased businesses for the period prior to acquisition: Stahlgruber Other acquisitions Acquisition related expenses, net of tax (2) Impact of share issuance from acquisition of Stahlgruber (0.01) (0.02) (0.03) Pro forma earnings per share from continuing operations, basic (3) Less: Pro forma net income attributable to noncontrolling interest Pro forma income from continuing operations attributable to LKQ stockholders $ 0.44 $ 0.42 $ 1.49 $ 1.39 Earnings per share from continuing operations, diluted - as reported $ 0.42 $ 0.39 $ 1.41 $ 1.33 Effect of purchased businesses for the period prior to acquisition: Stahlgruber Other acquisitions Acquisition related expenses, net of tax (2) Impact of share issuance from acquisition of Stahlgruber (0.01) (0.02) (0.03) Pro forma earnings per share from continuing operations, diluted (3) Less: Pro forma net income attributable to noncontrolling interest Pro forma income from continuing operations attributable to LKQ stockholders $ 0.44 $ 0.42 $ 1.48 $ 1.38 (1) Includes interest expense for the period from April 9, 2018 through September 30, 2018 recorded on the senior notes issued in connection with our acquisition of Stahlgruber. (2) Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed. 11

14 (3) The sum of the individual earnings per share amounts may not equal the total due to rounding. Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to depreciation on acquired property, plant and equipment, adjustments to rent expense for above or below market leases, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. The pro forma impact of our acquisitions also reflects the elimination of acquisition related expenses, net of tax. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses. The pro forma information also includes the impact of the common stock issued to Stahlgruber as if it were issued on January 1, These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results. Note 3. Discontinued Operations On March 1, 2017, LKQ completed the sale of the glass manufacturing business of its PGW subsidiary to a subsidiary of Vitro S.A.B. de C.V. ("Vitro") for a sales price of $301 million, including cash received of $316 million, net of cash disposed of $15 million. Related to this transaction, the remaining portion of the Glass operating segment was combined with our Wholesale - North America operating segment, which is part of our North America reportable segment, in the first quarter of See Note 16, "Segment and Geographic Information " for further information regarding our segments. In connection with the Stock and Asset Purchase Agreement, the Company and Vitro entered into a twelve-month Transition Services Agreement commencing on the transaction date with two six-month renewal periods, a three-year Purchase and Supply Agreement, and an Intellectual Property Agreement. The following table summarizes the operating results of the Company s discontinued operations related to the sale described above for the nine months ended September 30, 2017, as presented in Net loss from discontinued operations on the Unaudited Condensed Consolidated Statements of Income (in thousands): Nine Months Ended September 30, 2017 Revenue $ 111,130 Cost of goods sold 100,084 Selling, general and administrative expenses 8,369 Operating income 2,677 Interest and other income, net (1) 1,204 Income from discontinued operations before taxes 3,881 Provision for income taxes 3,598 Equity in loss of unconsolidated subsidiaries (534) Loss from discontinued operations, net of tax (251) Loss on sale of discontinued operations, net of tax (2) (4,280) Net loss from discontinued operations $ (4,531) (1) The Company elected to allocate interest expense to discontinued operations based on the expected debt to be repaid. Under this approach, allocated interest from January 1, 2017 through the date of sale was $2 million. This expense was offset by foreign currency gains. (2) In the first quarter of 2017, upon closing of the sale and write-off of the net assets of the glass manufacturing business, we recorded a pre-tax loss on sale of $9 million, and a $4 million tax benefit. The incremental loss primarily reflects a $6 million payable for intercompany sales from the glass manufacturing business to the aftermarket automotive glass distribution business incurred prior to closing, which was paid by LKQ during the second quarter of 2017, and capital expenditures in 2017 that were not reimbursed by the buyer. The glass manufacturing business had $4 million of operating cash outflows, $4 million of investing cash outflows mainly consisting of capital expenditures, and $15 million of financing cash inflows made up of parent financing for the period from January 1, 2017 through March 1, Pursuant to the Purchase and Supply Agreement, our aftermarket automotive glass distribution business will source various products from Vitro's glass manufacturing business annually for a three-year period beginning on March 1, Between January 1, 2017 and the sale date of March 1, 2017, intercompany sales between the glass manufacturing business and the continuing aftermarket automotive glass distribution business of PGW, which were eliminated in consolidation, were $8 12

15 million. All purchases from Vitro, including those outside of the Purchase and Supply Agreement, were $4 million and $22 million for the three and nine months ended September 30, 2018, respectively, and were $ 10 million and $27 million for the three months ended September 30, 2017 and the period between the sale date of March 1, 2017 and September 30, 2017, respectively. Note 4. Financial Statement Information Allowance for Doubtful Accounts We have a reserve for uncollectible accounts, which was approximately $63 million and $58 million at September 30, 2018 and December 31, 2017, respectively. Our May 2018 acquisition of Stahlgruber contributed $ 3 million to our reserve for uncollectible accounts. See Note 2, "Business Combinations" for further information on our acquisitions. Inventories Inventories consist of the following (in thousands): September 30, December 31, Aftermarket and refurbished products $ 2,287,776 $ 1,877,653 Salvage and remanufactured products 484, ,108 Manufactured products 22,357 16,022 Total inventories $ 2,794,894 $ 2,380,783 Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of September 30, 2018, manufactured products inventory was composed of $16 million of raw materials, $2 million of work in process, and $4 million of finished goods. As of December 31, 2017, manufactured products inventory was composed of $10 million of raw materials, $2 million of work in process, and $4 million of finished goods. Our May 2018 acquisition of Stahlgruber contributed $374 million to our aftermarket and refurbished products inventory. See Note 2, "Business Combinations" for further information on our acquisitions. Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements that extend the useful life of the related asset are capitalized. As property, plant and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our existing facilities. Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease and reasonably assured renewal periods, if shorter. Our estimated useful lives are as follows: Land improvements Buildings and improvements Machinery and equipment Computer equipment and software Vehicles and trailers Furniture and fixtures years years 3-20 years 3-10 years 3-10 years 5-7 years 13

16 Property, plant and equipment consists of the following (in thousands): September 30, December 31, Land and improvements $ 189,404 $ 137,790 Buildings and improvements 373, ,078 Machinery and equipment 618, ,526 Computer equipment and software 142, ,753 Vehicles and trailers 177, ,269 Furniture and fixtures 52,595 31,794 Leasehold improvements 283, ,506 1,837,915 1,476,716 Less Accumulated depreciation (691,086) (606,112) Construction in progress 54,174 42,485 Total property, plant and equipment, net $ 1,201,003 $ 913,089 The components of opening property, plant and equipment acquired as part of our acquisition of Stahlgruber in May 2018 are as follows (in thousands): Gross Amount Land and improvements $ 47,281 Buildings and improvements 125,649 Machinery and equipment 49,384 Computer equipment and software 3,760 Vehicles and trailers 643 Furniture and fixtures 28,535 Leasehold improvements 1, ,142 Construction in progress 3,519 Total property, plant and equipment $ 260,661 We record depreciation expense associated with our refurbishing, remanufacturing, manufacturing and furnace operations as well as our distribution centers in Cost of goods sold on the Unaudited Condensed Consolidated Statements of Income. All other depreciation expense is reported in Depreciation and amortization. Total depreciation expense for the three and nine months ended September 30, 2018 was $39 million and $115 million, respectively, and $34 million and $93 million during the three and nine months ended September 30, 2017, respectively. Intangible Assets Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer and supplier relationships, software and other technology related assets, and covenants not to compete. 14

17 The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2018 are as follows (in thousands): North America Europe Specialty Total Balance as of January 1, 2018 $ 1,709,354 $ 1,414,898 $ 412,259 $ 3,536,511 Business acquisitions and adjustments to previously recorded goodwill 1,073 1,002,277 (5,720) 997,630 Exchange rate effects (3,049) (55,901) 75 (58,875) Balance as of September 30, 2018 $ 1,707,378 $ 2,361,274 $ 406,614 $ 4,475,266 During the nine months ended September 30, 2018, we recorded $ 929 million of goodwill related to our acquisition of Stahlgruber. See Note 2, "Business Combinations" for further information on our acquisitions. The components of other intangibles, net are as follows (in thousands): September 30, 2018 December 31, 2017 Intangible assets subject to amortization $ 872,072 $ 664,969 Indefinite-lived intangible assets Trademarks 81,300 78,800 Total $ 953,372 $ 743,769 The components of intangible assets subject to amortization are as follows (in thousands): Gross Carrying Amount September 30, 2018 December 31, 2017 Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Trade names and trademarks $ 495,839 $ (88,805) $ 407,034 $ 327,332 $ (75,095) $ 252,237 Customer and supplier relationships 586,221 (223,085) 363, ,113 (167,532) 342,581 Software and other technology related assets 172,391 (73,760) 98, ,049 (59,081) 64,968 Covenants not to compete 13,488 (10,217) 3,271 14,981 (9,798) 5,183 Total $ 1,267,939 $ (395,867) $ 872,072 $ 976,475 $ (311,506) $ 664,969 The components of intangible assets acquired as part of our acquisitions in 2018 are as follows (in thousands): Nine Months Ended September 30, 2018 Stahlgruber Other Acquisitions Total Trade names and trademarks $ 173,946 $ 2,895 $ 176,841 Customer and supplier relationships 78,239 8,194 86,433 Software and other technology related assets 33, ,436 Total $ 285,529 $ 11,181 $ 296,710 15

18 The weighted-average amortization periods for our intangible assets acquired during the nine months ended September 30, 2018 and the year ended December 31, 2017 are as follows (in years): Nine Months Ended Year Ended September 30, 2018 December 31, 2017 Stahlgruber Other Acquisitions Total All Acquisitions Trade names and trademarks Customer and supplier relationships Software and other technology related assets Covenants not to compete Total acquired finite-lived intangible assets Our estimated useful lives for our finite-lived intangible assets are as follows: Method of Amortization Useful Life Trade names and trademarks Straight-line 4-30 years Customer and supplier relationships Accelerated 3-20 years Software and other technology related assets Straight-line 3-15 years Covenants not to compete Straight-line 2-5 years Amortization expense for intangibles was $42 million and $96 million during the three and nine months ended September 30, 2018, respectively, and $26 million and $74 million during the three and nine months ended September 30, 2017, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2022 is $40 million (for the remaining three months of 2018), $136 million, $104 million, $75 million and $62 million, respectively. Investments in Unconsolidated Subsidiaries Our investment in unconsolidated subsidiaries was $157 million and $208 million as of September 30, 2018 and December 31, 2017, respectively. On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen") for an aggregate purchase price of $181 million. Headquartered in Stockholm, Sweden, Mekonomen is the leading independent car parts and service chain in the Nordic region of Europe, offering a range of products including spare parts and accessories for cars, and workshop services for consumers and businesses. As a result of the investment, we nominated two representatives for election to Mekonomen's board of directors; both representatives were subsequently elected to and continue to serve on the board of directors, including one as the chairman of the board. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of September 30, 2018, the book value of our investment in Mekonomen exceeded our share of the book value of Mekonomen's net assets by $64 million ; this difference is primarily related to goodwill and the fair value of other intangible assets. We are recording our equity in the net earnings of Mekonomen on a one quarter lag. We recorded equity losses of $20 million and $18 million during the three and nine months ended September 30, 2018, respectively, and equity in earnings of $3 million and $5 million during the three and nine months ended September 30, 2017 related to our investment in Mekonomen, including adjustments to convert the results to GAAP and to recognize the impact of our purchase accounting adjustments. In May 2018 and May 2017, we received cash dividends of $8 million (SEK 67 million ) and $7 million (SEK 67 million ), respectively, related to our investment in Mekonomen. On July 6, 2018, Mekonomen announced the acquisition of two automotive spare parts distributors in Denmark and Poland. The objective of the acquisition is to strengthen Mekonomen's position in the sale of automotive spare parts in northern Europe and to establish a strong market position in Denmark and Poland, where Mekonomen has no current operations. The acquisition is partially being financed by a rights issue with preferential rights for Mekonomen's existing shareholders, who were given the right to subscribe for four new Mekonomen shares per seven existing owned shares at a discounted share price. On October 5, 2018, we subscribed for our pro rata share in the rights issue giving us the right to acquire an additional $48 million of equity in Mekonomen at a discounted share price, retaining our 26.5% equity interest. We recorded a derivative instrument of $29 million in Other assets on our Unaudited Condensed Consolidated Balance Sheets, which represents our right to acquire Mekonomen shares at a discount. We are measuring the derivative instrument at fair value, and we recorded a $3 million gain on our fair value remeasurement during the three months ended September 30, 2018; the gain is recorded in Other income, net on the Unaudited Condensed Consolidated Statements of Income. In the fourth quarter, we will record an $8 16

19 million loss related to the settlement of the derivative instrument in October 2018 due to a decrease in the Mekonomen share price from the last day of the third quarter to the settlement date. We evaluated our investment in Mekonomen for other-than-temporary impairment as of September 30, 2018, and concluded the decline in fair value was other-than-temporary due to a prolonged and significant stock price decrease. Therefore, we recognized an other-than-temporary impairment of $23 million, which represents the difference in the carrying value and the fair value of our investment in Mekonomen. The fair value of our investment in Mekonomen was determined using the Mekonomen share price as of September 30, The impairment charge is recorded in Equity in (losses) earnings of unconsolidated subsidiaries in our Unaudited Condensed Consolidated Statements of Income. Equity in losses and earnings from our investment in Mekonomen are reported in the Europe segment. As a result of the impairment charge, the Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at September 30, 2018 approximated the carrying value of $134 million. Warranty Reserve Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurancetype warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record the warranty costs in Cost of goods sold on our Unaudited Condensed Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The changes in the warranty reserve are as follows (in thousands): Balance as of December 31, 2017 $ 23,151 Warranty expense 33,670 Warranty claims (31,980) Balance as of September 30, 2018 $ 24,841 Recent Accounting Pronouncements Adoption of New Revenue Standard In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update , "Revenue from Contracts with Customers" ("ASU "). This update outlines a new comprehensive revenue recognition model that supersedes the prior revenue recognition guidance and requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several updates to ASU , which collectively with ASU , represent the FASB Accounting Standards Codification Topic 606 ( ASC 606 ). On January 1, 2018, we adopted ASC 606 for all contracts using the modified retrospective method, which means the historical periods are presented under the previous revenue standards with the cumulative net income effect being adjusted through retained earnings. Most of the changes resulting from our adoption of ASC 606 were changes in presentation within the Unaudited Condensed Consolidated Balance Sheets and the Unaudited Condensed Consolidated Statements of Income. Therefore, while we made adjustments to certain opening balances on our January 1, 2018 balance sheet, we made no adjustments to opening retained earnings. We expect the impact of the adoption of ASC 606 to be immaterial to our net income on an ongoing basis. See Note 5, "Revenue Recognition" for the required disclosures under ASC 606. With the adoption of ASC 606, we reclassified certain amounts related to variable consideration. Under ASC 606, we are required to present a refund liability and a returns asset within the Unaudited Condensed Consolidated Balance Sheet, whereas in periods prior to adoption, we presented the estimated margin impact of expected returns as a contra-asset within accounts receivable. Additionally, under ASC 606, the changes in the refund liability are reported in revenue, and the changes in the returns assets are reported in Cost of goods sold on the Unaudited Condensed Consolidated Statements of Income. Prior to adoption, the change in the reserve for returns was generally reported as a net amount within revenue. As a result, the income statement presentation was adjusted concurrently with the balance sheet change beginning in